Robert Mullins
MSNBC
April 17, 2005

Scant first quarter hiring by small businesses in Silicon Valley and elsewhere shows many companies still lack the confidence to make new permanent hires.

The small-business work force grew by just 0.2 percent in California in the first three months of 2005, versus the year ago period, according to an April 6 report from SurePayroll Inc., a Chicago-area provider of payroll management services to businesses with up to 100 employees. The national growth rate for the same period was zero, and just 0.1 percent for the entire Western region. At the same time, the size of the average paycheck shrank by 2.2 percent in California, 2 percent in the West and 1 percent nationally.

The rapid deceleration of the job machine looks particularly dramatic compared to California's healthy 8.2 percent job growth rate in 2004, which was second only to Virginia's 8.7 percent among all 50 states.

Although there are signs the economy continues to improve in certain industries, business is not steady enough for small business owners to hire people on a permanent basis.

That leaves contract workers seeking a permanent job in limbo.

"There is some talk of it being a permanent position," says Tiffany Hughes, 28, of her temporary assignment at a Silicon Valley biotech company that did not want to be identified.

Placed at the company by staffing firm Mentor 4 Inc. of San Jose to answer phones, Ms. Hughes gradually took on more assignments away from the reception desk. After showing an interest in biotechnology, the chief executive officer of the company began to mentor her, giving her work to do in the lab.

While the CEO says he wants to make Ms. Hughes a full-time employee, she remains a contract worker. At her previous assignment at a software company, she worked more hours but only because the company was laying off its permanent staff.

"It was their way of being cheap," she said, and not a good sign of her prospects for permanent employment there.

Using a contractor is more affordable for a small business than a permanent hire because they aren't paid benefits, or the agency pays them, says Michael Alter, president of SurePayroll. And the company can use the contractor for as little or as much as they need.

"I can hire and fire them in the same day," Mr. Alter says.

Small-business owners remain cautious about permanent hiring because other overhead is rising while options for raising new revenue are few, he says. Higher gasoline prices squeeze small businesses, especially those with vehicle fleets, while interest rate hikes increase their cost of capital. At the same time, marketplace pressures discourage businesses from raising prices.

Contractors give employers flexibility while the economy is in transition.

"If [they are] cautiously optimistic about the economy or cautiously pessimistic, the first thing a small business owner does is stop either hiring full-time employees or firing full-time employees, [and stays] flat in their hiring, supplementing with contractors," Mr. Alter says.

Nationally, 3.27 percent of the workers in small businesses at the end of March were contract employees, SurePayroll reports, which is up from 2.99 percent in March 2004 and 3.2 percent at the end of 2004.

M.E. Fox Distributors Inc., which delivers beverages to stores, hires extra summer help. But Fox will hire perhaps just five or six extra drivers this summer, versus the usual 10 to 11, says Dennis Fox, vice president of the San Jose company.

"Gas prices are affecting us dramatically," Mr. Fox says. "And consumers are not spending because they have less disposable income."

But the "Help Wanted" sign hasn't been pulled everywhere in Silicon Valley.

Staffing firm Robert Half International Inc. (NYSE:RHI), of Menlo Park, reports an increase in small-business clients seeking to rent with the option to purchase.

"Most of the clients are looking for someone who can work in the interim and also be open to full-time work at some point down the road," says Catrina Simbe, manager of a Robert Half office in downtown San Jose.

Rising gas prices or interest rates probably don't affect hiring decisions as much as "what is happening at their own company," Ms. Simbe says.

Skystream Networks Inc., of Sunnyvale, which has 100 employees, is aggressively hiring to keep up with demand for its IP video network equipment. Delivering video over Internet Protocol networks is one of the hottest tech sectors this year.

Skystream hires contract workers, but only because it needs people right away and there's little time to screen job applicants, says Megan O'Reilly-Lewis, director of corporate marketing.

"I'm hiring a contract worker tomorrow because I've got a trade show coming up. It's really busy during trade show season," Ms. O'Reilly-Lewis says. "It takes too long to find the right people."

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